In the first week of April, the final report on the Civil Code reform was discussed and voted on in the Federal Senate. The presentation of the consolidated report, scheduled for the first half of April, will be turned into a bill that will proceed through the Senate and, subsequently, the Chamber of Deputies.

The project proposes substantial changes to the doctrine of disregard of legal entity, especially noteworthy is the extension of its reach to agents who participate in and benefit from acts of abuse.

The law, which encompasses rules concerning private legal relationships, has undergone changes regarding the theme in 2019, with the advent of the Economic Freedom Law (“Lei da Liberdade Econômica”), and in 2021 and 2022 with norms related to the constitution and business activity.

To improve clarity and ensure consistent application by the Judiciary, the current text has been revised. The prior version was susceptible to misinterpretations, both by creditors seeking recourse for acts like asset commingling or diversion of purpose, and by companies facing lawsuits for risky business decisions with technical shortcomings, taken during the normal course of operations.

Brazilian law has been incorporating norms and developing precedents that make exceptions to the application of the so-called principle of asset autonomy, moderating the shielding of personalization by limiting liability, as a result of fraudulent acts committed by some entrepreneurs as means of evading legal or contractual obligations.

Such concern with curbing illicit activities is reflected in the general report of the Commission of Jurists in charge of reviewing and updating the current Civil Code.

The new draft of the general report expands liability for disregard of the legal entity to include a new category: associates of the legal entity who directly or indirectly benefit from the abuse.

The proposed amendment to the second paragraph of Article 50 allows courts to ignore the limited liability protection of associations in certain cases. This means that individual members with directorial power, or those who could influence the decisions that led to the misuse of the association, can be held personally liable.

The first paragraph also broadens the scope of legal entities which can be disregarded, specifically addressing foreign private law entities with civil or business activity, even those providing public services.

In the third paragraph, the proposal discusses reverse disregard, which is used to reach the assets of a partner, administrator, or associate who has used the legal entity to conceal or divert personal assets, causing harm to their creditors, hence the reform’s protective aim against fraudulent practices.

The fourth and fifth paragraphs still provide instructions on diversion of purpose and asset commingling. However, there’s a subtle but important change at the end of the fourth paragraph. The scope of the doctrine is being expanded to include liability for “abuse of right” as well.

The document clarifies what “asset commingling” means in the first part of the fifth paragraph. The seventh paragraph deals with a separate issue: forming an economic group. It clarifies that simply being part of an economic group doesn’t automatically mean a company can ignore legal obligations (disregard). However, if the group abuses its power to harm individual companies (personality abuse), then the courts may take action (repression).

Novelty also lies in the eighth paragraph: expanding or altering a company’s original business purpose doesn’t necessarily constitute a deviation of purpose. This clear statement in the law helps avoid confusion by the judiciary when applying the doctrine and seeks to foster flexibility in business operations while maintaining accountability

The commission revising the Civil Law aimed to make the rules clearer, benefiting legitimate businesses in two ways. Firstly, businesses will be less worried about expanding or diversifying because the revision clarifies that expanding on the original business purpose isn’t automatically considered a misuse of the company structure. This protection for honest business owners’ personal assets is crucial for a healthy economy with a thriving free market. Secondly, the clearer rules make it harder for malicious actors to misuse their company’s legal structure to avoid debts (personality abuse). This discourages fraud and allows creditors to recover what they are owed. Overall, these changes promote a business environment that protects honest actors while taking action against those trying to cheat the system.